Restraining Government in America and Around the World

Greedy Politicians Get their Comeuppance as Taxpayers Escape

If you’re a regular reader, you already know I’m a big supporter of tax competition and tax havens.

Here’s the premise: Politicians almost always are focused on their next election and this encourages them to pursue policies that are designed to maximize votes and power within that short time horizon. Unfortunately, this often results in very short-sighted and misguided fiscal policies that burden the economy, such as class-warfare tax policy and counterproductive government spending.

So we need some sort of countervailing force that will make such policies less attractive to the political class. We don’t have anything that inhibits wasteful spending,* but we do have something that discourages politicians from class-warfare tax policy. Tax competition and tax havens give taxpayers some ability to escape extortionate tax policies.

Now we have a couple of new – and very high-profile – examples of this process.

First, a big American drug company is seeking to redomicile in the United Kingdom.

Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers. …the company wishes to effectively renounce its United States citizenship. …a deal would allow it to follow dozens of other large American companies that have already reincorporated abroad through acquiring foreign businesses. They have been drawn to countries like Ireland and the Netherlands that have lower corporate rates, as well as by the ability to spend their overseas cash without being highly taxed. At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years. …American businesses have long complained about the corporate tax rate, arguing that in today’s global marketplace, they are left at a competitive disadvantage.

To get an idea of why companies want to redomicile, here’s another excerpt from the story.

…the British corporate tax rate is currently 21 percent and will soon fall to 20 percent. Analysts at Barclays estimated that for each percentage point less Pfizer paid in taxes, it would save about $200 million a year by reincorporating. People briefed on Pfizer’s discussions said that figure could be substantially higher. That means that Pfizer would be saving at least $1 billion a year in taxes alone. And moving to a lower-tax jurisdiction would allow Pfizer to tap cash that it holds overseas without paying a steep tax to bring it back to the United States. Of the company’s $49 billion in cash, some 70 to 90 percent of that is estimated to be held overseas.

I’m encouraged, by the way, that reporters for the New York Times are smart enough to figure out the destructive impact of worldwide taxation. Too bad the editors at the paper don’t have the same aptitude.

By the way, it’s worth pointing out that Pfizer’s expatriation doesn’t have any negative impact on America.

Pfizer points out that it would retain its corporate headquarters here and remain listed on the New York Stock Exchange. …Pfizer’s chief executive, Ian C. Read, a Briton, said Pfizer found it was hard to compete with other acquirers while saddled with “an uncompetitive tax rate.” Still, he added that even as a reincorporated British company, “we will continue to pay tax bills” in the United States.

The only meaningful change is that the redomiciled company no longer would pay tax to the IRS on foreign-source income, but that’s income that shouldn’t be taxed anyhow!

But it’s not the just the statutory tax rate. The WSJ also points out that the United States also wants companies to pay tax to the IRS on foreign-source income even though that income already has been subject to tax by foreign governments!

The U.S., almost alone among the world’s governments, demands to be paid on a company’s world-wide profits whenever those profits are brought back to the U.S.

In addition to its sales headquarters, Toyota says it plans to move 3,000 professional jobs to the Dallas suburb… Toyota’s chief executive for North America Jim Lentz…listed the friendly Texas business climate…as well as such lifestyle benefits as affordable housing and zero income tax.

This isn’t the first time this has happened.

In 2006, Nissan moved its headquarters from Gardena—north of Torrance—to Franklin, Tennessee. CEO Carlos Ghosn cited Tennessee’s lower business costs.

The bottom line is that greedy California politicians are trying to seize too much money and are driving away the geese that lay the golden eggs.

According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country. …Since 2011 more than two dozen California companies including Titan Laboratories, Xeris Pharmaceuticals, Superconductor Technologies, Pacific Union Financial and Med-Logics have relocated in Texas. Dozens of others such as Roku, Pandora and Oracle have expanded there.

Maryland is the latest state to make its estate tax less onerous, and it’s significant because it’s a staunchly Democratic state indicating that easing the pain of the death tax isn’t just a Republican issue. Today the Maryland Senate passed the measure, already passed by the House, gradually raising the amount exempt from the state’s estate tax to match the generous federal estate tax exemption.

And other blue jurisdictions seem to be learning the same lesson.

In New York, Gov. Andrew Cuomo’s budget calls for increasing the state’s estate tax exemption from $1 million to match the federal exemption, and lowering the top rate from 16% down to 10% by fiscal 2017. …A commission on tax reform in the District of Columbia recently recommended raising D.C.’s estate tax exemption from $1 million to the federal level. …In Minnesota, Democratic Governor Mark Dayton has proposed doubling the state estate tax exemption from $1 million to $2 million as part of a bigger tax package.

This is why tax competition is such a wonderful thing. There’s no question that politicians in states such as New York don’t want to lower the burden of the death tax.

9 Responses

The politicians in Washington are never left out in the cold. The deficit will get picked up by the average Joe. The prospect of cutting spending does not exist in DC. Next up- federal bailout of bankrupt states.

Reblogged this on Public Secrets and commented:
First it was Toyota here in California fleeing to Texas, and now Pfizer want to reincorporate in the UK. Both are perfect illustrations of the insanity of statist tax policy: legislators think they can take as much as they want, and the “marks” will keep on paying. But, eventually, the marks have had enough and simply leave, thus leaving the greedy, foolish legislator with nothing.

Eventually we will get a conservat8ive congress- the pendulum always swings. I hope Pfizer left themselves a back door back in when they eventually roll back the corporate tax rate.

With respect to liberal states rolling back the death tax, I’m guessing that one of their constituents (i.e. donors) is about to receive a great inheritance, and promised a percentage of the take for their re-election fund. I’d like to have the data to follow the money trail on that.

I’m all for a “Debt Brake” on spending, but we need a carrot in addition to a stick.

If politicians meet Debt Brake targets, we should give them a bonus. This should be substantial [2x salary?]. The cost would be about $200 million, but it would slow spending that exceeds $2 trillion. That would be less than .01%, and I’ll bet it would save a lot more than $200 million.

Territorial taxation is a good reason why the flat tax should be a hybrid (income/sales) tax, which would encourage domestic employment.

One of the supposed benefits of a tax on sales is that export prices would be held down, by not taxing overseas sales. — Good for the producers, but not so good for US consumers, who would need to shoulder the tax difference.

Instead, we could have a flat tax on US salaries and a flat NST that would allow deductions for salaries paid only.

Exports would have taxes on salaries embedded, but no NST tax; reducing the price somewhat overseas but collecting some domestic taxes.

Companies that imported their components would face the NST tax on all but US salaries paid, increasing their cost relative to current practice.

Companies that exported most of their goods made in the US would have substantial deductions against any NST, thereby promoting jobs domestically.

[Note that all flat taxes on sales have problems with cascading taxes on taxes, but this would reduce the problem, and avoid the problem of “not for retail sale” black markets.]

[…] Panamanian law firm. Activists on the left, working in concert with international bureaucracies and uncompetitive governments, want to create a global tax cartel (sort of an “OPEC for politicians“) in hopes of […]